A U.S. District Court judge on Dec. 4, 2022, threw out a lawsuit by the National Association of Manufacturers (NAM) challenging the SEC’s revision to proxy voting advice rules under Chair Gary Gensler.
In an 18-page memorandum opinion granting the commission’s motion for summary judgment, Judge David Counts of the Western District of Texas concluded that “like it or not, changing political winds may factor into an agency’s policy preference,” and found the July rules in Release No. 34-95266, Proxy Voting Advice, were within “the bounds of reasoned decision making.”
NAM and the Natural Gas Services Group sued the SEC shortly after the release of those final rules, which rolled back core elements of 2020 rules imposing new requirements on so-called proxy voting advice businesses (PVABs) in Release No. 34-89372, Exemptions from the Proxy Rules for Proxy Voting Advice. Groups such as NAM and the U.S. Chamber of Commerce – longtime critics of proxy firms – had supported those original rules, accusing the firms of being conflicted and opaque in their methodology. The Chamber and other groups are separately suing the commission in U.S. District Court for the Middle District of Tennessee.
Proxy firms such as Institutional Shareholder Services (ISS) and Glass, Lewis & Co. make recommendations on how institutional investors should vote on a range of topics, including director elections, executive compensation, and environmental, social and governance (ESG) issues such as climate risk disclosure.
Release No. 34-89372 set new conditions for proxy firms to remain exempt from the information and filing requirements of the proxy rules that included making new conflict-of-interest disclosures; making their recommendations available to the companies either before or the same time they provide them to clients; and providing a way for clients to access any response that the company provides to the voting advice in a timely manner before the vote. (See SEC Issues Rule Increasing Regulation of Proxy Advisers in the July 23, 2020, edition of Accounting & Compliance Alert.)
The Gensler-led revisions in Release No. 34-95266 scrapped the latter two conditions and amended a provision related to liability for failing to disclose material information in proxy voting advice. The commission concluded that the informational benefits provided by the 2020 requirements did not justify the potential harm to proxy firms.
NAM, in its complaint, had argued that the SEC did not provide an adequate basis for reversing the 2020 rules. But Counts concluded that the 2022 rules were based on the same factual record as the prior ones, and since the commission did not contradict those prior factual findings, it was not required to provide a more detailed justification.
“The 2022 Rescission’s conclusion was an abrupt about-face,” Counts wrote. “But the factual findings on which the 2022 Rescission based that conclusion were the same.”
Counts also rejected the plaintiff’s argument that the 31-day comment period on the rule proposal, which overlapped with the Christmas and Hanukkah holidays last year, violated the Administrative Procedure Act (APA).
Counts’ opinion comes months after he sided with NAM in a separate but related suit over the commission’s non-enforcement policy on the 2020 rules. (See Judge Strikes Down SEC’s Non-Enforcement Policy on 2020 Proxy Advisory Firm Rules in the Oct. 4, 2022, edition of ACA.)
This article originally appeared in the December 7, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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